In both the long and short term insurance industries in South Africa, commission payable by or on behalf of insurers for the sale of insurance products is regulated by law by imposing a maximum level of commission calculated as a percentage of the premium. This is also referred to as "capping".
Maximum commission regulation was introduced as a result of unjustifiably high rates of commission and its continued escalation due to a broker-driven market.
During 1999 the Financial Services Board (FSB) prepared and widely circulated a consultative paper on the continued regulation of maximum commission. The FSB and the advisory committees on short term and long term insurance submitted a proposal to the Policy Board for Financial Services and Regulation to do away with the statutory regulation of maximum commission. This was approved in principle by the policy board and the FSB has circulated proposed amendments for comment.
The Short Term and Long Term Insurance Acts make provision for the introduction of the policyholder protection rules which will compel the insurers to give full disclosure once implemented. The proposal has therefore been developed on the basis that there will be full disclosure before any alteration to the commission regulation. This will be in keeping with international trends where regulation is not of price control but the emphasis is on disclosure.
Amendment of regulations under the Short Term Insurance Act and the Long Term Insurance Act
The present position is that maximum commissions are prescribed by regulation. The new regulations will no longer prescribe maximum commissions that can be paid for services rendered as an independent intermediary.
Commission will now be determined by assessing the value of the service that has been rendered. Moreover, short term insurers, long term insurers and Lloyd's brokers will have to keep written records on the prearranged commission payments negotiated with each independent intermediary regarding a policy sold to a specific policy holder or with regard to the specific product. The written records are necessary since the authorities will have to supervise the full disclosure of inter alia commission to be paid that will follow with the implementation of the policyholder projection rules. Commission payments will have to be a predetermined amount which should not be manipulated once the policy has been sold. Independent intermediaries will still have to reverse commission if premiums are refunded.
The proposed changes will only become effective after the coming into operation of the policyholder protection rules. The appropriate levels of commission will be determined by market forces.